The CFPB is concerned that you don’t know how to avoid an overdraft fee

posted at 3:55 pm on February 22, 2012 by Tina Korbe

The Consumer Financial Protection Bureau’s latest all-consuming interest is overdraft fees. How do such fees affect consumers? How is overdraft protection marketed? How are consumers able to avoid the fees? Those are some of the questions the CFPB seeks to answer with its latest probe. Specifically, the inquiry will examine the following:

— The reordering of transactions in ways that increase costs to consumers.

— Missing or confusing information. The agency wants to make sure people understand how they can avoid overdraft fees. It will look at how the fees are disclosed and what other options are presented.

— Misleading marketing. The number of people who choose overdraft protection varies widely from bank to bank, the CFPB noted. It wants to know how marketing affects people’s decisions. The Center for Responsible Lending report noted several examples of misleading or threatening language in banks’ marketing materials.

— Disproportionate impact on low-income and young consumers. According to a 2008 study by the Federal Deposit Insurance Corp., 9 percent of checking accounts incur 84 percent of overdraft fees. The study found that nearly half of younger cardholders paid the fees.

Of the four, only the first bothers me. Apparently, as bankers process consumer transactions, they’ll reorder the transactions from the largest to the smallest, so more transactions will incur an overdraft fee. But banks known to engage in reordering are already paying the price for it: Bank of America settled one class-action lawsuit that challenged the bank on the practice for $410 million last July, and JPMorgan Chase settled $110 million on a similar suit.

As to the rest? I have the solution for consumers who wish to avoid overdraft fees: Don’t spend money you don’t have. Politicians and bureaucrats clearly haven’t learned this lesson themselves, so they’re not going to teach consumers fiscal responsibility anytime soon, but it would surely save the CFPB a lot of hassle.

Overdraft fees are annoying — but government interference is even more so. As we learned with Dick Durbin’s debit card legislation, banks will hike costs elsewhere if the government bans overdraft penalties. (Yes, banks cleverly call the penalties — essentially really high-interest short-term loans — “overdraft protection,” but, c’mon consumers, surely you’re smart enough to figure out what that means!)

If the CFPB really has to investigate this issue (I’d prefer we have no CFPB at all!), why don’t they ask how many transactions that incur overdraft penalties represent the purchase of actual necessities? (By necessities I mean “food, clothes, shelter.” By “food, clothes, shelter,” I mean “enough food, clothes and shelter to stay healthy.” By “healthy,” I mean “unencumbered by non-discriminating diseases.” By “non-discriminating diseases,” I mean diseases that are brought on by malnutrition or cold or something — not by lifestyle choices.)

Given that 9 percent of checking accounts are responsible for 84 percent of overdraft fees — and half of all young checking account holders have paid the fees at some point — I’d say kids haven’t learned to do without what they don’t need for the sake of staying within budget. It’s a skill worth developing. Here’s a good, basic principle: “Use it up, wear it out, make it do — or do without.”

P.S. I’ll be talking about this topic and others on Fox Business Channel’s “The Willis Report” today at about 5:35 p.m. ET. The show also re-airs at 8 p.m. ET and 11 p.m. ET. Hope you can tune in!

Breaking on Hot Air

Blowback

Note from Hot Air management: This section is for comments from Hot Air's community of registered readers. Please don't assume that Hot Air management agrees with or otherwise endorses any particular comment just because we let it stand. A reminder: Anyone who fails to comply with our terms of use may lose their posting privilege.

Trackbacks/Pings

Comments

I find this hilarious.
Much like how people think USDA choice actually means something.
OR how they think the health department is really keeping them safe.
Or how they think the USDA actually inspects meat plants (clue: they don’t).
Or even how people think the FDA actually keeps them ‘safe’.
News flash: YOU keep you safe.

I had no idea that overdraft protection was a supposed FEATURE that was not required. What a sham.

Did you know that even before the new law went into effect it was possible to opt out of overdraft protection at any time? I didn’t.

red_herring on February 22, 2012 at 4:00 PM

You don’t have to give these people your business.
There a lots of other banks around.
My bank, only one & a small town bank, will charge me overdraft fees on occasion, but they often waive them bcs we are good customers (mortgages, farm loans etc).
You really are free to go elsewhere.

I also thought that was why people might opt in for something like overdraft protection as a service.
Or simply don’t spend $$ you don’t have.
Why does the bank necessarily have to be your credit card?

You don’t have to give these people your business.
There a lots of other banks around.
My bank, only one & a small town bank, will charge me overdraft fees on occasion, but they often waive them bcs we are good customers (mortgages, farm loans etc).
You really are free to go elsewhere.

But I thought (at most people i’ve asked about it) that overdraft was simply a fee that all banks have. It turns out it’s a FEATURE, and anyone can opt out at any time.

I have the solution for consumers who wish to avoid overdraft fees: Don’t spend money you don’t have. Politicians and bureaucrats clearly haven’t learned this lesson themselves,

No, politicians won’t learn until we get rid of the habitual professional elected office holders who first and foremost look out after their own and their cronies best interests, which usually involves diverting public funds for personal gain.

While I don’t agree with this new board in general, there are some overdraft practices which are pretty sleazy, such as reordering transactions to increase the number of overdrafts. Also the fact that they could deny transactions on an overdrawn debit card, but intentionally don’t so they can charge you a fee on it.

Overdraft fees are not exclusive “privilege” of young and irresponsible customers. Occasionally, the savvy people who pay bills on time and have no shortage of cash flow – such as yours humbly – also fall victim to bank practices. Whether it is a check that didn’t “register” on time, or an “data entry problem”, or “technical glitch”, for some mysterious reason they always favor the bank. More often than not, all fees and charges are removed after an hour-long scandal over the phone, but not everyone has patience, resolve, and well-trained throat to match mine.

I would gently reply: read the fine print. Wells Fargo’s fine print is a mere 2 pages, it’s in fairly clean legal-speak, and it is VERY UPFRONT about all of these issues.

Or, you know, don’t spend your account empty. I have a very simple budget process: add up all my essential expenses for a pay period, increase by half, and keep that amount in the checking account AT ALL TIMES. Take same figure, multiply by 6, keep that amount in savings account. If you keep your account balances at these levels, you will never experience overdrafts! Hell, you’ll even earn some interest! And if you can’t do that immediately, well then STOP CONSUMING a little bit. It’s shocking how fast your bank account grows when you don’t waste dollars at McDonald’s.

I find this method works best because young people (with instant access to their checking accounts) don’t keep registers, since the bank keeps one for you. Where people screw up is they forget about the pay-at-the-pump gas or whatever, and being young and poor operate their account with razor-thin margins. Just demonstrate the benefit of padding in the account, and fees go away magically.

They are bsing their conclusions on their experience of the IQs of Obama voters and their understanding of banks and how they work in general. Besides, if you have never had a banking account, what would you know or care about overdrafts.

But I thought (at most people i’ve asked about it) that overdraft was simply a fee that all banks have. It turns out it’s a FEATURE, and anyone can opt out at any time.

Why did NO banks tell their customers this?

red_herring on February 22, 2012 at 4:08 PM

Part of the reason is that bounced checks are felonies in some states, so banks decided that covering a check and charging a fee was far more desirable for all parties involved. Check doesn’t bounce, customer and business avoid court, bank makes money and likely retains a customer.

Whether it is a check that didn’t “register” on time, or an “data entry problem”, or “technical glitch”, for some mysterious reason they always favor the bank.

When I worked for Bank of America, its official policy was to terminate abusers of overdrafts. My branch often didn’t on a few of the most prolific of overdrafters. “Why?” I asked. Because these customers evidently didn’t mind paying up on the huge numbers of overdraft fees, the bank profiting handsomely from the irresponsible account holders, they were charged every month just for the privilege of regularly overdrawing their accounts. Now, I ask, who was abusing whom?

Earlier this year, Bank of America (BAC) agreed to pay $410 million to settle a federal lawsuit alleging the bank charged excessive overdraft fees. That suit was just one of several filed against banks from plaintiffs in 14 states that were consolidated in a federal court in Florida. Other banks named in related suits include Wells Fargo (WFC) and Citibank (C). Banks have been taken to task for specifically processing payments from largest to smallest, a way designed to cause more overdrafts, rather than chronologically.

A recent study from The Pew Charitable Trusts, Hidden Risks: The Case for Safe and Transparent Checking Accounts, found that overdraft penalty fees are disproportionate to the size of the average overdraft amount, and that the penalties cost consumers tens of billions of dollars each year. In fact, these charges are estimated to cost Americans $38.5 billion in 2011, which is an increase of $18.6 billion since 2000, according to Pew. While banks do incur a risk that they won’t be repaid when they approve such transactions, most institutions manage this by limiting the overdraft coverage given to each individual costumer.http://www.dailyfinance.com/2011/05/13/bank-overdraft-fees-still-plague-american-consumers/

Actually it is getting harder and harder to prevent overdrafts. Government interference has left me without the ability to have three or four accounts at a single bank as free accounts, allowing me to have an expense account, a primary savings account, a Christmas savings account and vacation savings account. Now all these accounts are spread between several banks and it takes days to move money from a savings account to the spending account if I am short for any reason. So, now I have to drive to one bank, withdraw and drive to another bank an deposit.

Of course, if I was doing as well financially today as I was before George W Bush and his crony capitalists destroyed the economy, it would not matter. Should I blame Obama? Sure, he has plenty of faults for keeping the economy in the dumps, but that does not absolve George W Bush and the rest of his crony capitalist of their wrongdoing. It is why I will not ever support Romney, one of the many reasons. Romney will be as bad if not worse than Bush was.

If you try to withdraw money from an atm/use your check card/write a check for more money than you have in your account, rather than deny the transaction, the bank will “loan” you the money and charge you a fee (usually $20 or so) for the loan.

For the past 25 years since we had our joint checking account ( my wife and I are now officially on our 25th year) we have never overdrawn one time. Our bank, however, about 15 years ago I think, mistakenly thought we had once. They charged us. When we showed them our deposit receipts, they were wonderful. We even received a personal letter from the bank president apologizing for the $25. or $50. fee… whatever it was.

Maybe the banks should just bounce the checks or deny ATM withdrawals if there is not enough money in the account. That way the customer would save the $20 to $35 but their credit rating would go in the toilet pretty fast unless they decide to maintain a reasonable balance.

Transaction order is a big deal. Most large banks process debits over credits so even if you are depositing enough cash to cover the check, the check, and overdraft, will be processed first. Requiring banks to process credits over debits will eliminate many overdrafts, which the banks don’t like as it reduces fee income.

Maybe the banks should just bounce the checks or deny ATM withdrawals if there is not enough money in the account. That way the customer would save the $20 to $35 but their credit rating would go in the toilet pretty fast unless they decide to maintain a reasonable balance.

Dasher on February 22, 2012 at 4:29 PM

That actually is their policy. Providing overdraft “protection” is a feature that you can opt into (previously most banks required you to opt out).

To put it briefly, I have about as much compassion for the fight between the large banks and the government as I do for one bunch of Muslims killing another bunch of Muslims. I say we give ‘em weapons and let ‘em have at each other.

It’s a penalty which people have to pay to the bank
if the bank ends up paying for what you can’t pay,
which is thus predatory and racist lending on part of the banks
and as such need to go , for social justice reasons ofcourse.
Soon, Hussein will read a speech telling us how free overdraft is a human right .

Some banks will reorder transactions so that deposits are “counted” last – and that withdrawals are counted first; increasing the likelihood of an overdraft for people who live week to week.

lorien1973 on February 22, 2012 at 4:13 PM

There are reasons other than greed to do this, such as batch transaction processing windows in the ACH. It’s a three-step process: submit debits to ACH for clearing, wait for response, submit reply. The response comes the following batch day, and also contains the incoming deposits. the reply is the acknowledgement of deposits and batch-close for a given deposit day, so money at the Fed is allocated appropriately. In some banks, the deposit action is also a company-wide batch, which is combined with the ACH deposit. Transaction processing therefore:

Complicated, but the problem is the legal basis for each transaction changes its priority, payment method, etc etc. Debit card transactions represent hard obligations by the bank, so they must be processed first. Checks and demand debits are different and can be denied, so they go next. External deposits are processed last (unless direct deposit) because they must be acknowledged in the reply file so the Fed can transfer money between the banks’ Fed accounts.

So it’s not entirely greed, but greed lessens the motivation to change any of this.

Given that 9 percent of checking accounts are responsible for 84 percent of overdraft fees — and half of all young checking account holders have paid the fees at some point — I’d say kids haven’t learned to do without what they don’t need for the sake of staying within budget.

Do they have a demographic breakdown of that 9%? I’m sure that would be illuminating.

Young inexperienced people would naturally end up with those fees. I’m more curious about individuals who are old enough to know better yet still end up overdrafting their accounts.

The Center for Responsible Lending was initially bankrolled by Herb and Marion Sandler and also has connections to Soros-related groups. There are several CRL staffers in high positions as CFPB now.

rockmom on February 22, 2012 at 4:36 PM

That’s a blast from the past… SNL got in trouble a few years ago because one of their writers, when doing a bailout skit, had a news chyron on the screen describing the Sandlers as “people who should be shot”. That little clip has since been “disappeared” from the SNL episode on re-airings and Hulu.

I worked in a bank years ago…and more than once that was the explanation I received from an irrate customer!
I had a lady open an account with a thousand dollars, and five days later came screaming at me, because she had only used five of her “starter checks” and had the rest of the book left! She had written forty one hundred dollars in mortgage and car payments.

“The CFPB is concerned that you don’t know how to avoid an overdraft fee”

The lunatic-left dolts really, really need BIG GOVERNMENT and its stooges in the lamestream socialist media to tell them what to wear, what to eat, what to think, what to drive, what to carry groceries in, what box to check in elections, how to avoid an overdraft fees, what to drink, what to do every moment of every day….

Otherwise, they would just endlessly spin around in circles until they collapsed into a hot steamy pile.

Some of the comments here explain one of the major reasons why government is so intrusive: we have in many ways asked for it! This overdraft thing is a classic example. Suppose you are one of the people who got charged an overdraft fee that you didn’t know about; suppose the reason is that you didn’t read the fine print or you didn’t ask or you didn’t educate yourself or maybe even you managed to find a really sleazy bank with which to do business. So, then, why is this the default reaction that so many people have: “There ought to be a law against that.” People: you cannot legislate each and every activity so that as you go through life you will never face a risk, never be imperiled, never be swindled or cheated or put upon. That’s life! But if you run crying to government to solve every little problem, then what you get is what we have: an over-regulated, micromanaged, inefficient, bureaucratic nightmare that does not eliminate every risk, punish every wrong doer, prevent any accident, injury, illness or insult, but that does suck the life out of the economy and impinge upon the liberty of its people. Government needs to back off. And some of us need to grow up.

Some of the comments here explain one of the major reasons why government is so intrusive: we have in many ways asked for it! This overdraft thing is a classic example. Suppose you are one of the people who got charged an overdraft fee that you didn’t know about; suppose the reason is that you didn’t read the fine print or you didn’t ask or you didn’t educate yourself or maybe even you managed to find a really sleazy bank with which to do business. So, then, why is this the default reaction that so many people have: “There ought to be a law against that.” People: you cannot legislate each and every activity so that as you go through life you will never face a risk, never be imperiled, never be swindled or cheated or put upon. That’s life! But if you run crying to government to solve every little problem, then what you get is what we have: an over-regulated, micromanaged, inefficient, bureaucratic nightmare that does not eliminate every risk, punish every wrong doer, prevent any accident, injury, illness or insult, but that does suck the life out of the economy and impinge upon the liberty of its people. Government needs to back off. And some of us need to grow up.

When I worked at a small, community bank, we had customers who also thought as long as they had checks, they had money. Those customers should not have checking accounts but we would try to help them manage it best we could until the time came when we needed to close the accounts for their own good. We also had customers who gladly paid an OD fee so their rent, mortgage or car payments would not be returned insufficient funds as they were always just a few days behind. They considered it an extra service the bank provided and thanked us for it. I realize not all banks treated their customers that way but this administration wants to demonize every bank. It’s ridiculous. Ultimately, personal responsibility should matter. At least it used to.

– got an ARM mortgage and now cry that they were duped by the eeeeeevil mortgage lenders

– pay 30% interest on credit cards and cry that the eeeeeevil credit card companies are being unfair

– pay overdraft fees and cry that the eeeeeevil banks are hurting them

I’d bet a lot of money that it’s the same people in each of the 3 groups and bet even more money 90% of them have a HOPE 2012 sticker already on the back of their cars (which of course are purchased with a 17.29% interest loan).

the level of moronicity is frightening…serious at least half of this country is already Greecian…wanting to live the high life on someone else’s dime

let’s start in the good old days. NSF..checks returned…or Bounced Check (or check kiting is you are a crook). Ok, your check is returned and the person who you made the check out is screwed…and will charge you a NSF fee…unless of course you try to evade, then go to police (this will surprise some that this could be a crime)

So years ago Banks decided to be good guys. And offer overdraft protection

Overdraft fees are charged by banks when customers try to spend more money than they have in an account.

Banks will allow the transaction, then charge the customer a penalty of as much as $35.

“We’ve heard many stories about the $40 cup of coffee,” the agency’s director, Richard Cordray, told reporters and representatives from banks and consumer groups.

We should go back to the old system…if you bounce a check to get to pay money to both the bank and the vendor.

and the occupy/Lizzy Warren types like

if you haven’t noticed the banks using software to move your purchases around to maximize overdraft fees of$35 for tiny overdrafts… then you’ve been asleep or you got money like Obama.

Why didn’t you ask?
You are the customer.
It is your responsibility to know what you’re getting into.
And if you are confused or feel uneasy about it, DON’T partake of their services.
It really is this easy.

I’ve never seen a reordering of transactions through direct banking cards. So I’d like to see proof. That’s the first thing.

Second thing is overdraft, period. I remember when declines used to occur, now it’s a rare animal for credit cards and direct-bank cards. In the end, this is individual responsibility, the financiers ALLOW this to happen with a consequence of the ‘loan’. So this issue has wiggle-room no matter which side you are on. I would like to see folks have an option to disallow an overdraft.

don’t forget card processing has fees regardless of outcome, how long till they run their business too.

The woman in front of me at the checkout counter of the gas station should have that tattooed on her forehead. She’s buying soft drinks and candy for the kids. First credit card, DECLINED, second credit card DECLINED, “Oh, TRY THIS ONE!”.

I thought the CFPB head “recess” appointment was “extra” unconstitutional because the enabling statute actually required confirmation before he/she could act. Silly me to think anyone in DC is paying attention to any rules anymore, even the rules they write for themselves.

So, then, why is this the default reaction that so many people have: “There ought to be a law against that.” People: you cannot legislate each and every activity so that as you go through life you will never face a risk, never be imperiled, never be swindled or cheated or put upon. That’s life!
natasha333 on February 22, 2012 at 4:50 PM

Well said.
Does anyone else remember the Sunday Morning cartoon
“There Oughta Be A Law!”?
Maybe that’s why the “default reaction” got so embedded in our national character!

I’ve had checking accounts for more than 40 years and I have never balanced a check book. It’s a simple matter of never writing a check for more than you have in the account. It is a no-brainer today with a handy cell phone.

If you haven’t gone to CFPB.gov don’t bother. It is the most patronizing, child-like website that has been put up. Have you been abused by credit card companies? What are the complaints about your mortgage company? How do you feel about your student loans? As a mortgage banker, I fear for what is left of our industry. These people in no way will exhibit any reasonableness or fairness in their audit approaches.

The lunatic-left dolts really, really need BIG GOVERNMENT and its stooges in the lamestream socialist media to tell them what to wear, what to eat, what to think, what to drive, what to carry groceries in, what box to check in elections, how to avoid an overdraft fees, what to drink, what to do every moment of every day….

Otherwise, they would just endlessly spin around in circles until they collapsed into a hot steamy pile.

“It was the most memorable time of my life. It was a touching moment because I never thought this day would ever happen. I won’t have to worry about putting gas in my car. I won’t have to worry about paying my mortgage. You know, if I help him, he’s gonna help me.”

I had a situation my freshman year of college, when I was young, dumb, living on a minimal allowance and neglecting to carry such things as my insurance card. Got a concussion, a hospital visit, and got a $2200 bill. Unfortunately, I made the mistake when I checked into the hospital of giving them my wallet, where they proceeded to put my debit card into their system. I only had $1100 in my account, and one of the later things they did the first day was a CT or MRI (can’t remember which…) scan of my head to check for swelling of the brain. $1200 charge. Instead of doing that in chronological order, where I’d have been hit by 7-8 overdraft fees, the bank shifted it to the front of the line, causing me to get hit by over 50 separate overdraft charges. The overdrafts cost me more than the actual hospital visit.

Arguably one of the worst details of this mess (other than the reordering to screw me), is that I had asked my bank of the time, when I opened the account, if overdraft could be disabled or blocked. They straight-out told me, “No.”

The re-ordering is a real concern, because I’ve had it happen personally, and it is an out-and-out screwing of the customer. The rest of it? People need to read what they sign. Learn the first time, and you won’t have the problem again.

The issue with a bounced check is that it has to be specially handled. That costs money. Banks process millions of checks and these days mostly electronically. The actual cost of hand processing a returned check is higher than the $35.00 most banks charge.

The best way to deal with this is either a small automatic advance credit line, “overdraft protection”, or better yet don’t overdraw your account.

I’ve had checking accounts for more than 40 years and I have never balanced a check book. It’s a simple matter of never writing a check for more than you have in the account. It is a no-brainer today with a handy cell phone.

wukong on February 22, 2012 at 7:34 PM

Balancing a checkbook shouldn’t be as much of a problem now as it used to be. Electronic check debits have eliminated “float,” which was the prime reason back in the day that balancing checkbooks was even necessary.

Balancing a checkbook shouldn’t be as much of a problem now as it used to be. Electronic check debits have eliminated “float,” which was the prime reason back in the day that balancing checkbooks was even necessary.

gryphon202 on February 23, 2012 at 9:23 AM

Ah, there is still float, it’s just generally much shorter. See my post above; check processing takes a full 3 days, even if the bank is aware of and debits you on the first day. But you’re correct in the point you’re making: the situations in which one generates float are uncommon now, unless one habitually pays for everything with checks.